Specter, Other Dems, Looking to Reverse Huge Securities Decision

The Journal’s SEC reporter, Kara Scannell, sent along this post on a new congressional bill that could give plaintiffs lawyers — especially those who file shareholder fraud suits — a shot in the arm.

Plaintiffs’ lawyers could gain a new line of business, if a bill backed by three Democratic Senators moves forward.

Sen. Arlen Specter, the Pennsylvania lawmaker who recently flipped to Democrat from Republican, introduced a bill on July 30 that, if passed, would reverse the Supreme Court’s 2007 Stoneridge decision and expand the number of entities shareholders can sue in corporate fraud cases.

The legislation is already attracting strong reaction from the trial bar and big business. The U.S. Chamber of Commerce, the nation’s largest business lobby, opposes the bill. Lisa A. Rickard, president of the Chamber’s Institute for Legal Reform, said, ”Greatly expanding private securities class action lawsuits will only slow our economic recovery, drag down investors’ portfolios and retirement accounts, and delay the creation of much needed new jobs.”

Dan Newman, a spokesman for the large plaintiffs firm Coughlin Stoia Geller Rudman & Robbins countered: “For our economy and our financial markets to thrive, corporations must be held accountable when they commit fraud.”

The stakes are high. If the bill is adopted or added to the broader regulatory reform package it could be a boon for the trial bar and a headache for advisers. Lawmakers who advocated on behalf of the plaintiffs’ position in the lead-up to the Supreme Court fight, including House Financial Services Chairman Barney Frank, could push for its passing, but it would still need to gain key Republicans in the Senate before it could become law. Frank’s office couldn’t be immediately reached for comment.

In the 2007 case known as “Stoneridge” the Supreme Court ruled in a 5-3 vote that shareholders can’t sue third parties, such as accountants, lawyers, and bankers for aiding in a fraud committed by the company whose stock they own. (Justice Breyer recused himself because he owned stock in a company named in the case). The Securities and Exchange Commission and Justice Department can and do prosecute those individuals under aiding and abetting statutes. Click here for a post from the day Stoneridge came down; here for a 2007 back-and-forth between lawyers on either side of the debate.

The high court decision reaffirmed the current law, but at the time plaintiffs’ lawyers launched an aggressive lobbying, public relations and litigation campaign in hopes of expanding the scope of potential defendants, especially to deeper pockets once companies involved in a fraud went out of business. It was countered by an equally aggressive effort by the business lobby.

Spector’s bill, which is co-sponsored by Jack Reed (D-R.I.) and Edward Kaufman (D-DE), would reverse that decision by amending the securities laws to allow for private litigation against a person that provides “substantial assistance” in violating the law.

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